UNIVERSITY OF TARTU FACULTY OF SOCIAL SCIENCE AND EDUCATION POLITICAL SCIENCE Master’s thesis The relationship between tax system and political regime in resource wealthy countries Marie Jaksman Supervisors: Professor Emeritus Rein Taagepera, PhD Senior Research Fellow Andrey Belyy, PhD Tartu, 2013
68
Embed
The relationship between tax system and political regime ...dspace.ut.ee/bitstream/handle/10062/32241/jaksman_marie.pdf · The relationship between tax system and political regime
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
UNIVERSITY OF TARTU
FACULTY OF SOCIAL SCIENCE AND EDUCATION
POLITICAL SCIENCE
Master’s thesis
The relationship between tax system and political
regime in resource wealthy countries
Marie Jaksman
Supervisors: Professor Emeritus Rein Taagepera, PhD
Senior Research Fellow Andrey Belyy, PhD
Tartu, 2013
2
Olen koostanud magistritöö iseseisvalt ja kõik töö koostamisel kasutatud teiste autorite
tööd, põhimõttelised seisukohad kirjandusallikatest ja mujalt pärinevad andmed on
viidatud.
Olen nõus töö avaldamisega Tartu Ülikooli digitaalarhiivis DSpace.
/Marie Jaksman/
3
Abstract
This thesis exploits the relationship between taxation and level of democracy in
resource abundant countries. The research is derived mainly from concepts of rentierism
and fiscal sociology. Supporting the institutional explanation for rentierism, I argue that
resource wealthy countries are secured with economical autonomy and therefore are not
obligated to share political power more broadly with citizens in exchange for tax
revenues or other forms of support. In order to analyze the linkage I have carried
through three correlations using data from World Bank, IMF and Marshall, Gurr,
Jaggers Polity IV . First, I find relatively strong support that resource-rich countries rely
more on resource revenues than on established taxes. However, this research finds little
support for the hypothesis that countries with a lower citizen taxation burden indicate
resource rich autocracies. Last but not least, there seems to be no connection between
the size of personal income and the type of political regime. Keeping in mind these
results, this thesis proposes that fiscal policy plays a great role in the general
institutional framework but the role of taxation as a secondary factor stays modest.
The relationship between the wealth of natural resources and politics has raised much
academic interest. There is a commonly accepted understanding that natural resources
have a great influence on a country’s development, but the direction of the influence
remains debatable. On the one hand, natural-resources could promote democracy. There
is a variety of literature which claims that natural resource-wealthy countries tend to
have better prospects for development than countries with a low level of resources1. The
resulting framework implies that natural resources provide economical stability to
countries and therefore tend to grant more democracy2. On the other hand, there are
studies which claim resource revenues have regime-stabilizing properties. The
prominent theme contends that whatever externally obtained resources enable a regime
to stay in power by whatever means are best for that regime, and this is true in
democracies as it is in dictatorships3. In this sense, natural resources do not have
“antidemocratic” or “pro-democratic” properties. In addition, there are several studies
that imply a negative influence from natural revenues also variously termed in the
literature as “paradox of plenty” or “resource curse”4. The New York Times columnist
Thomas Friedman argues in his article “First Law of Petropolitics”, that “the price of oil
and the pace of freedom always move in opposite directions in oil-rich petrol states”5.
According to Thomas Friedman, a country could be defined as a petrol country if they
are highly dependent on oil exports and with weak institutions or authoritarian
governments. The author lists Azerbaijan, Angola, Chad, Egypt, Equatorial Guinea,
1D`Arcy, Michelle (2012) “Taxation, Democracy and State-Building: How Does Sequencing Matter?“; QoG
Working Paper Series, Vol. 4, p. 4. 2 For example the case of Botswana. After becoming independent from Britain in 1966 Botswana have proved to be one of the fastest growing developing nations and model for democrats through the region. Today Botswana`s diamond industry represents one third of the country’s GDPs and account for up to 70 – 80% of its export. For more see Eigen, Peter (2005) “Avoiding the Resource Curse: What can we learn from the case of Botswana?, Transparency International, (URL: http://eadi.org/gc2005/confweb/papersps/Peter_Eigen.pdf, accessed May 19, 2013). 3 Morrison, Kevin M. (2009) “Oil, Nontax Revenue, and the Redistribution Foundations of Regime Stability”, International Organization, Vol. 63, No. 1, pp. 107-138. 4 See for more Stevens, Paul (2003) “Resource Impact: Curse or Blessing? A Literature Survey” Journal of Energy Literature, Vol. 9, No. 1, pp. 3-42; Davis, Graham A., Tilton, John E. (2005) “The Resource Curse”, Natural Resources Forum, Vol. 29, No. 3, pp. 233-242. 5 Freedman, Thomas L. (2006) “The First Law of Petropolitics”, Foreign Policy, No. 154, p. 31.
Iran, Kazakhstan, Nigeria, Russia, Saudi Arabia, Sudan, Uzbekistan, and Venezuela as
high petrol states. Therefore, countries like Britain, Norway, the United States etc, with
already democratic institutions before their oil was discovered, are not subjected to the
First Law of Petropolitics”.
The aim of this thesis is to test the negative effect of natural resources often referred to
as the resource curse. The fact that many of the poorest and most troubled countries in
the world have a high level of resource wealth (See Figure 1) gives us reasonable
evidence to believe in the harmful effect of natural resources. One of the most recent
influential and comprehensive works on this topic by Michael L. Ross concludes that
the oil-impedes-democracy claim is both valid and statistically robust, “…oil does hurt
democracy and resource rents promote authoritarian rule6.”
The core of the framework of this thesis is, firstly, the concept of “rentierism”, which
refers to states becoming heavily dependent on natural resource exports. Author of the
Energy Economic: Concepts, Issues, Markets and Governance Subhes C. Bhattacharyya
defines the resource export dependency as resource export revenues as a fraction of
GDP. This is led by the idea that higher resource prices bring higher expected export
revenues resulting in more dependency on resource export revenue for its GDP. Subhs
C. Bhattacharyya identifies four indicators of resource dependency. First, the average
effective export price, in constant US dollars per ton of export. Secondly, resource
export importance compared to domestic use. Thirdly, oil dependency of the economy
and last but not least, primary energy intensity of the economy.7 The second central idea
of this thesis is the concept of “fiscal sociology” by Joseph Schumpeter, referred to also
as the “taxation effect”. The purpose of revenue taxes in democratic countries is to fill
the state budget and share responsibilities with its citizens. However, this “no taxation
without representation” claim does not often apply to resource-rich countries. “There is
no immediate need to share political power more broadly with citizens in exchange for
tax revenues or other forms of support”8. Blessed with natural resources, a government
receives sufficient revenues from the sale of natural resources, so there is no actual need
6 Ross, Michael L. (2001) “Does Oil Hinder Democracy?“, World Politics, Vol. 53, No. 3, p. 356. 7 Bhattacharyya, Subhes C. (2011) Energy Economic: Concepts, Issues, Markets and Governance, Springer-Verlag: London, pp. 453-454. 8 Dunning, Thad (2008) Crude Democracy: Natural Resource Wealth and Political Regimes (Cambridge Studies in Comparative Politics), Cambridge University Press, p. 2.
7
to collect taxes from citizens. Thus, it is more likely that natural resource-rich countries
tax their citizens less or not at all. Instead of collecting revenues the primary function of
the state has become distributer of the revenues. Providing society with all kinds of
well-being and social support has become the basis for legitimacy. In turn, it is
reasonable to believe the government is less accountable to their citizenry, and the
general public has less interest and chance to demand accountability and representation
from their government.
The aim of this thesis is to test the linkage between taxation and regime in resource
abundant countries. The general argument of this thesis takes for assumption that
resource rents grant countries financial autonomy and, therefore, immunity from social
pressure, since citizens are not necessarily included on the tax level, resulting in passive
social outcome. The main hypothesis of this thesis contends that taxation as an
institutional effect influences the level of democracy. This thesis supports the
institutional approach for explaining a country’s social and economic undergoing,
however the results of careful empirical analysis indicate that the relationship between
fiscal policy and the level of democracy is not in a linear correlation. In other words,
taxation as a secondary factor within the institutional framework is not the decisive
factor.
In order to analyze if the tax system in resource-rich countries could hinder democracy,
I will explore three aspects of this claim. First, I will claim that mineral-wealthy
countries have financial autonomy and are not obligated to collect taxes from citizens.
Do resource-wealthy countries tax the population on the same basis as resource poor
countries? If not, there is great reason to believe that their state budget is covered
mainly by revenues from the sale of natural resources, and citizens’ contribution stays
modest. This leads to my second hypothesis. I claim that petrochemical-rich countries
tend to be more autocratic, since citizens are not included on the tax collection level. Is
it correct that democratic countries include more citizens into governing the state than
autocratic countries? Do countries with higher personal taxes tend to be more
democratic or not, keeping in mind the “taxation effect”? Thirdly, how does personal
income influence the regime, especially in resource wealthy countries?
8
There have been many studies on oil and its influence on a states development9.
However, the scholarly attention towards natural-resources in general has stayed
relatively modest. I believe the relationship between natural resources and politics
should be analyzed in a broader sense and not be limited only to oil. It is reasonable to
expect that if the rents from oil have an undermining effect on a state`s democracy, this
effect should apply to other “externally obtained” revenues as well. Secondly, the
concept of “rentier state” has often been used in the context of the Middle East.
Furthermore, many “global studies” have excluded Middle East in their studies as an
exception. However, I believe there is no reasonable ground for doing so. If natural
resources are truly at fault, a comprehensive study could add knowledge about the so
called “resource curse” all over the world. It could help explain and predict political
problems in resource-wealthy countries around the world, such as Nigeria, Indonesia,
Venezuela, Russia etc. Thirdly, using a simple analytical model for data available for
2010 can provide us with valuable insight into the current relationship between natural
resources and political systems. It would be useful to analyze if the relationship is
preserved in a cross-time analysis, however, this goes beyond the scope of this research.
In the remainder of this thesis I will proceed as follows. First, I begin with outlining the
central concepts of this thesis. Chapter 2, “Theoretical Framework”, provides us with
knowledge about previous empirical and theoretical research in the field of the resource
curse. I will clarify the concepts of “rentier state” and “taxation effect” and describe the
previous academic background. Chapter 3 describes the research design and is followed
by results and discussion in Chapter 4. Chapter 5 takes a closer look on the state-
economy relationship in resource rich Norway, Venezuela and Qatar. This thesis ends
with a conclusion and short guidelines for further research (Chapter 6).
9 See for example Michael L. Ross (2001) “Does Oil Hinder Democracy?” World Politics, Vol. 53, pp. 325-61; Smith, Benjamin (2006) “The Wrong Kind of Crisis“, Studies in Comparative International Development, Vol. 40, No. 4, pp. 55-76; Karl, Terry L. (1997) The Paradox of Plenty: Oil Booms and Petro-States, Berkley and London: California University Press; Tsui, Kevin K. (2011) “More Oil, Less Democracy: Evidence From Worldwide Crude Oil Discoveries”, The Economic Journal, Vol. 121, No. 551, pp. 89-115; Stevens, Paul (2003) “Resource Impact: Curse or Blessings? A literature survey”, Journal of Energy Literature, No. 9, Vol. 1, pp. 3-42; Davis, Graham A.; Tilton, John E. (2005) “The Resource Curse”, Natural Resources Forum, Vol. 29, No. 3, pp. 233-242.
9
FIGURE 1. “Countries by political regime type and resource dependency”10
Figure 1 illustrates the relationship between mineral wealth and regime type. The figure
charts countries based on their regime types by Marshall, Gurr and Jaggers Polity IV
data, and countries marked with yellow dots indicate countries heavily dependent on
mineral resource exports, based on data from World Bank. As we can see, half of the
autocracies are heavily dependent on resources export. Moreover, 44% of resource-rich
countries are labeled as strong autocracies, as compared to two resource-rich
democracies out of 95 democratic countries (See Appendix 1).
10 Own compilation based on Marshall, Monty G.; Gurr, Ted R.; Jaggers, Keith (2011) „Polity IV Individual Country Regime Trends, 1946-2010”, Polity IV Project: Political Regime Characteristics and Transitions, 1800-2011, (URL: http://www.systemicpeace.org/polity/polity4.htm, accessed April 22, 2013) and fuel export percentage of merchandise exports data from World Bank, (URL: http://data.worldbank.org/indicator/TX.VAL.FUEL.ZS.UN, accessed April 22, 2013).
This thesis presents an institutional approach for explaining the negative social and
economic performance in resource abundant countries. I claim that taxation as a part of
the general institutional framework has a great influence on democratic development. In
the following chapter I will provide a general overview of the debate over the political
economy of resource curse and a short empirical background for the reasons. I will
concentrate more closely on the theory of rentierism and the “taxation effect”.
2.1 The political economy of the resource curse
It is clear, that revenues from natural resources create opportunities for countries to
develop faster than they would otherwise do. However, except for a few cases, the
natural resource rich countries have experienced lower economic growth and social
performance than countries without natural resources – a phenomenon often referred to
in academic literature as resource curse. The debate over how natural resources affect
economic and social development is still relevant and receives significant academic
attention. Although there is a general acceptance that natural resource abundant
countries tend to perform economically worse, explanations for the reasons are still
debatable. The debate is diversified by using different units for analyzing and by chosen
methods and available data. All in all, for understandable reasons it is important to
understand the reasons why natural resources undermine economic and social
development, especially for countries struggling with resource wealth. Before, digging
into the crucial concepts of this thesis, I will review the academic literature, both
empirical and theoretical, for the reasons of economic and social undergoing in resource
rich countries.
Before we can continue, there has to be questioned if the resource curse really exist. The
negative link between resource wealth and economic performance was demonstrated in
the 1980s. However, the term was not proposed before 1993 by British economist
Richard M. Auty to describe the social and economic undergoing of resource-rich
11
countries11
. More recently, among other empirical researches, van der Ploeg gives a
comprehensive overview of the effects of natural resources and emphasizes that the
effects and outcomes of having natural resources varies considerably12
. In this light, one
of the first and most comprehensive studies in the field was carried through by Jeffrey
D. Sachs and Andrew M. Warner in “Natural Resource Abundance and Economic
Growth”13
. Analyzing ninety seven countries from 1971 to 1989 by using the share of
exports of products in the gross national product, the results confirmed the negative
relationship between economic development and resource abundance. Michael L. Ross,
claims in his comprehensive analysis “Does Oil hinder Democracy?” that wealth from
natural resources makes states less democratic. He argues that this idea has not been
subjected to careful statistical tests, and is simply overlooked as an explanatory
variable. Results from Kevin K. Tsui support Michael L. Ross findings. His article
“More Oil, Less Democracy: Evidence from Worldwide Crude Oil Discoveries”
concludes that discovering 100 billion barrels of oil lowers a countries democracy level
by almost 20 percentage points below trend after three decades14
. Taken into account
the several number of scholar works and convincing empirical research, there is enough
evidence to believe that the resource-rich countries follow different path of development
and are struggling to use the natural wealth efficiently.
There is a variety of literature analyzing the reasons for poor resource management
resulting in low economic and social performance in resource abundant countries.
Although the results have stayed fragmented we could allocate the explanations into
four main categories. First, the earliest explanation emerged from explaining
Netherlands`s negative economic performance after enormous oil discoveries in the
North Sea. The approach, called “Dutch disease”, suggested more economic reasons
for decreasing economic growth, emphasizing mainly the role of markets. In the core of
the theory lies the non functioning linkage between resource and non-resource export
11 Auty, Richard M. (1993) Sustaining Development in Mineral Economies: The Resource Curse Thesis, London: Routledge. 12 van der Ploeg, Frederick (2011) “Natural Resources: Curse or Blessing?” Journal of Economic Literature, Vol. 49, No.2, pp. 366-420. 13 Sachs, Jeffrey D.; Warner, Andrew M. (1995) “Natural Resource Abundance and Economic Growth”, NBER Working Paper, No. 5398. 14 Tsui, Kevin K. (2011) “More Oil, Less Democracy: Evidence From Worldwide Crude Oil Discoveries”, The Economic Journal, Vol. 121, No. 551, pp. 89-115.
12
sector. In other words, the theory of Dutch disease claims that exporting natural
resources could strengthen a nation`s currency compared to other nations and making
the manufacturing sector less competitive, resulting in low economical growth15
.
Several other approaches give social reasons more prominence. Ivar Kolstad and Arne
Wiig refer to it as “decentralized explanations for resource curse”16
, also titled as
societal explanations by Ross17
, concentrating on the incentives of the private or public
agents outside the power elite. In the core of this approach lies the assumption that
natural resources create a self-enrichment mentality. In other words, the rents from
natural resources allure entrepreneurs in the productive sector to become rent seekers.
There is a significant number of papers analyzing how the social mechanisms are
causing the unproductive exploitation of rents. In this case, however, one of the main
models by Mehlum, Moene and Torvik illustrates the idea with producers and grabbers
equilibrium18
. When producers enter the process of rent seeking, the opportunity cost
(the next-highest-valued alternative use of that resource) declines, which evokes more
grabbers. However, authors emphasize that the outcome of this equilibrium depends on
the quality of institutions. Strong institutions are able to keep off the rent seeking even
with increasing natural resources, while adding natural resources to this equilibrium
with weak institutions creates more grabbers. Another example is provided by Ragnar
Torvik showing the negative attraction of resource booms by reducing the number of
entrepreneurs running productive, wealth creating firms in the public sector19
.
Thorvaldur Gylfason further exemplifies that the abundance of natural resources
decreases investments especially in human capital, resulting in slow economic
development20
.
15
For more look van der Ploeng, Frederick; Poelhekke, Steven (2009) „Volatility and the Natural Resource Curse“, Oxford Economic Papers, Vol. 61, No. 61, pp. 727-760. 16 Kolstad, Ivar; Wiig, Arne (2009) „Political Economy Models of the Resource Curse: Implications for Policy and Research“, Governance of Africa`s Resources Program, No. 40, pp. 1-19. 17 Ross, Michael L. (1999) „The Political Economy of the Resource Curse“, World Politics, 51, pp. 297-322 18 Mehlum, Halvor; Moene, Karl; Torvik, Ragnar (2006) „Institutions and the resource curse“, The Economic Journal, No. 116, pp. 1-20. 19 Torvik, Ragnar (2001) „Natural resources, rent seeking and welfare“, Journal of Development Economics, Vol. 67, pp. 455-470. 20 Gylfason, Thorvaldur (2001) „Natural resources, education and economic development“, European Economic Review, Vol. 45, pp. 847-859.
13
Thirdly, one modification of the previous approach is the cognitive explanation for
resource curse, which contends that “resource booms produce a type of short–
sightedness among policymakers”21
. Meaning, that instead of long-term development,
immediate bounties are chosen. According to this approach, profitable resources
generate competition that could control these and this, in turn, could lead to conflicts
and rent seeking. This idea is supported by a comprehensive analysis by Eoin F.
McGuirick who argues that new unearned revenues from oil selling create political
competition and dysfunctional behavior. Leading powers use every means to secure
their position and therefore the state’s development stays in the background. Others
argue that natural resource abundance leads to greater corruption and inefficient
bureaucracies. For example, the IMF working paper by Carlos Leite and Jens
Weidmann argues that natural resource dependence causes not only economic
slowdown but also makes countries more open to risk of violent conflict, greater
inequality, less democracy and more corruption22
.
Fourthly, by far the most common and latest explanations for the resource curse have
been political reasons or so-called state-centered approaches mixing cognitive, societal
and institutional arguments, often referred to as theories of the rentier state. The
institutions term has posed a great deal of scholarly attention. International Monetary
Fund working paper by Andrei A. Levchenko defines institutions as “a wide range of
social structure affecting economic outcomes: contract enforcement, property rights,
shareholder protection, the political system and the like”23
. Carlos Pareira and Vladimir
Teles continue by saying that “political institutions, formal and informal, determine
both the constraints and incentives faced by key players in a given society. The political
institutions are capable of decreasing risks opportunistic behavior of political and
economic players”24
. Although a concrete definition for a “good political institution” is
missing it is often referred to as institutions operating without patronage, rent-seeking,
21 Ross, Michel L. 1999: 298. 22 Leite, Carlos; Weidmann, Jens (1999) “Does Mother Nature corrupt? Natural resources, corruption and economic growth“, IMF working paper 99/85. 23 Levchenko, Andrei A. (2004) „Institutional Quality and International Trade“, IMF Working Paper, Vol. 4, No. 231, p. 3. 24
Pereira, Carlos; Teles, Vladimir (2011) “Political Institutions, Economic Growth, and Democracy: The Substitute Effect“, Brookings, (URL: http://www.brookings.edu/research/opinions/2011/01/19-political-institutions-pereira, accessed May 9, 2013).
corruption and intimidation and their capacity to keep the rules of the contract. The
Paradox of Plenty by Terry Lynn Karl explains, after analyzing six case studies, that
natural resource wealth leads to impropriate fiscal reliance on petrodollars and public
spending, resulting in destabilizing the regimes and weakening state institutions25
. Kjetil
Bjorvatn, Mohammad R. Farzanegan, and Friedrich Schneider modified these results
and found a mountain of evidence of harmful effects of resource revenues in countries
with weak governments. According to the authors, revenues are best used in countries
with strong governments outperforming the strength of other institutions. “Indeed, with
a strong government, resource wealth is likely to be growth enhancing, even when
institutions are relatively weak”26
.
As previously illustrated, institutions are the key elements mediating the effects of
natural resources to economic development. According to Ivar Kolstad and Arne Wiig
the boundaries between decentralized and centralized approaches remain blurry27
,
meaning that there is no pure example of one of them. Analyzing centralized models
require some variables from centralized models and vice versa. Michael L. Ross adds
that decentralized models offer an easy and tempting way to explain the resource curse;
however, this approach misses empirical proof28
. It is very difficult to scientifically
prove the incentives of decision makers and the connections between the wealth of
revenues and the slow economic growth.
In this thesis I will support the institutional approach to the resource curse. “Institutions
constitute rules of the game that influence the positive and negative effects of resource
rents and their relative dominance in a both centralized and decentralized political
economy”29
. The economic problem of a resource abundant country is not only the
question how to manage resources but also how to secure the best use of resources. And
this is done by strong and transparent institutions. Next, I will take a closer look on the
rentier state theory and, later, present the effects of institutional inability to fiscal
capacity.
25 Karl, Terry L. (1997) The Paradox of Plenty: Oil Booms and Petro-States (Studies in International Political Economy), University of California Press. 26 Bjorvatn, Kjetil; Farzanegan, Mohammad R.; Schneider, Friedrich 2012: 1308. 27
Kolstad, Ivar; Wiig, Arne 2009: 9. 28 Ross, Michael L. 1999: 310. 29 Kolstad, Ivar; Wiig, Arne 2009: 15.
15
2.2 Theory of rentierism
Before we can learn how tax systems influence the political regime in natural resource
wealthy countries we have to understand the concept of “rentierism” and “rentier state”.
The concept has raised several intellectual debates; however mutual agreement on how
to define rentierism/rentier state is still missing. The concept of the “rentier state” was
first postulated by Hussain Mahdavy with respect to pre-revolutionary Pahlavi Iran in
1970, since then it has been widely used to refer to mainly oil-rich countries in the Arab
world30
. The theory refers to countries which derive a substantial part of their revenue
from external economic rent. In a broader sense the rent is understood as “the income
derived from the gift of nature”31
. In this light, every country is considered more or less
a rentier state. Understanding more social function behind this idea, the concept was
revisited by Hazem Beblawi. Author of The Rentier State in the Arab World suggested
that for a country to be identified as a rentier state it has to fulfill four basic elements32
.
Firstly, based on its predecessor, Beblawi stated that the rent situation has to
predominate. However, the author admits that the percentage remains a matter of
judgment. Secondly, the rents are paid by foreign actors and therefore can sustain
without a strong domestic production sector. Thirdly, while these two previous
conditions constitute a rentier economy, in order to become a rentier state only a few
are engaged in the generation of this rent (wealth) and the majority are only involved in
the distribution or utilization of it. This means that the creation of general wealth is in
the hands of a very limited group. Last but not least, the main receiver and the benefiter
is the state government. This means that economic power is closely linked to political
power, which gives governments the possibility to distribute wealth within their own
best interests.
30 Yates, Douglas A. (1996) The Rentier State in Africa: Oil Rent Dependency and neocolonialism in the Republic of Cabon, Threnton, NY: Africa World Press, p. 11. 31
Marshall, Alfred (1920) Principles of Economics, London: Macmillan and Co., Ltd, 8th
edition, p. 350. 32 Beblawi, Hazem (1987) “The Rentier State in the Arab World”, The Rentier State, edited by Beblawi, Hazem and Luciani, Giacomo, Croom Helm, pp. 51-52.
16
Hussain Mahdavy was mainly interested in cases in which “effects of the oil sector are
significant and yet the rest of the economy is not of secondary importance”33
. Also,
Hazem Beblawi argues that although, the rentierism is mostly seen in oil rich countries,
the concept is not exclusively about oil. However, not all natural resources produce
rents for the country. The author of the Crude Democracy Thad Dunning defines natural
resources that produce rents as resources that are geographically concentrated, generally
capital-intensive in production, and pose high barriers to entry for many private actors.
Resources that produce rents are relatively easy for the state to tax, and taxing these
sectors generally does not involve separating a wide swatch of citizens from their
private income34
. In this sense, being dependent on exporting natural resources like
coffee beans or fruits does not count as rentierism. Last of all, although the concept of
rentierism stays arbitrary, we can see that the main characteristic ground for
rentierism/rentier state is the rentier mentality, which refers to the broken classical
economic concept of work-reward causality.
There are three commonly accepted causal mechanisms underlying the argument that
rentierism harms democracy. First, the “rentier effect” implies that rentier states have a
“blessed position” thanks to financial autonomy. Michael L. Ross distinguishes three
sub-categories. The “taxation effect” claims that governments derive sufficient
revenues from the sale of oil and therefore do not tend to tax the population very
heavily. The “spending effect”, claiming that resource wealth may lead to greater
spending on patronage, which in turn deepens the pressure for democratization35
. Last
but not least, the “group formation” effect. Ross argues, that secured with revenues, the
government tries to prevent the formation of social groups that are independent from the
state and hence that would be inclined to demand political rights36
. However, the
freedom from levying taxes “release[s] the state from the accountability ordinarily
exacted by domestic appropriation of surplus. “…The state may be virtually completely
autonomous from its society, winning popular acquiescence through distribution rather
33 Mhadavy, Hossain (1970) “The Pattern and Problems of Economic Development in Rentier States: The Case of Iran“, Studies in the Economic History of the Middle East: From the Rise of Islam to the Present Day, edited by Cook, Michael Allan, Oxford: Oxford University Press, p. 431. 34
Dunning, Thad 2008: 28. 35 Ross, Michael L. 2001: 333. 36 Ross, Michael L. 2001: 334.
17
than support through taxation and representation37
”. The second causal mechanism
could be called the “repression effect”, which implies states have a capacity to buy off
and repress the opposition. This also refers to greater military expenditures in securing
the regime. According to Michael Herb, these two previous mechanisms could be
brought under the concept of “rentier social contract”, meaning that the state provides
goods and services to society, who will in turn provide state officials with a degree of
autonomy in decision-making38
. The third causal mechanism is called the
“modernization effect”, which argues that resource revenues limit socioeconomic
changes. This means that oil-driven development often has an influence on state-market
relations and deviate the balance redundantly towards the state.
In this paper I will support the first claim that resource wealth causes governments to
perform poorly in economic development because of a “blessed” economic situation. In
the following part I will continue with “taxation effect” in more detail. Governments are
responsible for implementing taxation systems and by doing so increase the demand for
democratic accountability. However, in the rentier economy, which refers to an
economy where revenue is more of an “occurred” rent than an “earned” income39
, the
wealth is concentrated around a small fraction of the society and, blessed with financial
autonomy, they are not willing to give up their privileges.
2.3 Taxation and political regimes
In the following section I will take a look at the linkage between taxation and level of
democracy in resource abundant countries. I will argue that taxation as a secondary
factor within an institutional approach has influence on the social outcome, however,
not as strong as political institutions themselves.
The common belief that taxes can foster a democracy lies in the interpretation of
political development in early modern Europe and colonial America40
. Foremost it
37 Anderson, Lisa (1987) “The State in the Middle East and North Africa“, Comparative Politics, Vol. 20, No. 1, p. 10. 38 Herb, Michael (2005) “No Representation without Taxation? Rents, Development, and Democracy“, Comparative Politics, Vol. 37, No, 3, p. 300. 39Beblawi, Hazem 1987: 86. 40 Ross, Michael L. (2004) ”Does Taxation Lead to Representation?“, B.J. Pol. S., Vol. 34, p. 230.
18
refers to modern European history, when monarchies were obliged to hand over some of
their authority to parliamentary institutions, in exchange for the ability to raise new
taxes. Until 16th
century the sovereignty of monarchies in Europe was derived from
their own private properties. While missing the right to tax, the falling of feudal
organizations and the state`s increasing military expenditures raised the need for extra
income. However, taxing was not thinkable without giving citizens back some social
securities. No matter what the taxes were used for – to cope with emergencies above
with war, the monarchy had to give up some degree of power. Adding a public sphere to
the ruling of the state gave birth to the modern state. Many scholars of US history bring
up the example of the Revolutionary War in 1760s, when the British government
introduced three new measures to collect more taxes. In order to cover the Seven Years
War the Sugar Act, the Stamp Act and the New Townshend levies were implemented.
Most historians believe that this taxation without consent lead to rebellions, boycotts
and organized resistance which helped to produce riots that finally resulted in
independence and governments with strong representative institutions. In other words,
this bargaining with the authority for tax contribution lead the way for a modern
democracy with representative institutions. Keeping this in mind, it is no surprise that
“in many countries voting rights have been linked to tax contributions, both rhetorically
and practically“41
.
This previously described fiscal sociology paradigm is advanced by Joseph Schumpeter.
In the early twentieth century Schumpeter developed a theory that claimed taxation was
central to state-building. The general assumption is that „the budget is the skeleton of
the state stripped of all misleading ideologies“42
other than democracy. In other words,
the fiscal pressure of the state reshapes the people and government. However, it does
not mean that the fundamental change in the social structure could be brought out by
changing the structure of revenues, rather it reflects that the state`s nature has changed
and attitudes toward life and its culture cannot stay the same. According to Schumpeter,
this sharing authority and the responsibilities had several benefits for both sides.
However, this consensual path tended to benefit rulers only in the long run. In the short
41
Moore, Mick (2004) “Revenues, State Formation, and the Quality of Governance in Developing Countries”, International Political Science Review, Vol. 25, No. 3, p. 302. 42 Schumpeter, Joseph (1991) Crisis of the Tax State, Springer, US, p. 7.
19
term they took the risk of sharing power and decisions. But most importantly, „rulers
dependent on taxes developed a stake in the prosperity of (some of) their citizens and
therefore faced incentives to promote that prosperity, which, in turn, would generate
more revenues and strengthen the state“43
.
The linkage between fiscal policy and political regime has generated great empirical
analysis. Although the positive effect on the regime is commonly posed, the empirical
assessments come to different conclusions and empirical proof has stayed modest. José
Antonio Cheibub has analyzed the problem of different taxation systems in different
political regimes. His “Political Regimes and the extractive Capacity of Governments:
Taxation in Democracies and Dictatorships” finds support for the claim that taxes tend
to be higher in democracies than in dictatorships. However, the author admits, that “we
should not infer that this is due to any inherent feature of democratic regimes”44
.
Meaning that differences in the taxation systems in different political regimes are not
brought upon the inability to collect taxes efficiently. Both democracies and
dictatorships are capable of collecting taxes equally and the differences lie somewhere
else. Lead by this, Eoin F. McGuirck used micro-level data from public opinion surveys
across sub-Saharan countries and to find clear evidence in support of the “resource rents
lower the taxation burden” hypothesis. Eoin F. McGuirick argues that an “increase in
resource rents lowers perceived tax enforcement, which itself is a significant predicator
of the demand for accountability (a one point increase in perceived tax enforcement
raises the demand for accountability by around third of a point. Both are measured on
four-point scales)45
. These results are also supported by “Sovereign rents and quality of
tax policy and administration” by Stephen Knack who finds plenty of evidence for the
claim that resource revenues reduce the quality of the taxation system46
. Michael L.
Ross also raises the question between taxation and democracy in a comprehensive
research “Does Taxation Lead to Representation”. The main question is whether
democracies have a higher taxation burden since they produce more representation or
43 Moore, Mick 2004: 300. 44 Cheibub, José A. (1988) “Political Regimes and the extractive Capacity of Governments: Taxation in Democracies and Dictatorships”, World Politics, Vol. 50, No. 3, p. 373. 45 McGuirck Eoin F. (2013) “The illusory leader: natural resources, taxation and accountability“, Public Choice, Vol. 154, p. 287. 46 Knack, Stephen (2009) “Sovereign rents and quality of tax policy and administration“, Journal of Comparative Economics, Vol. 37, pp. 359-371.
20
not? The author concludes that there is no connection between higher taxes and social
outcome. Works by Paola Profeta, Ricardo Puglisi and Simona Scabrosetti47
and the
„Rentier Wealth, Unruly Law, and the Rise of Opposition“ by Gwenn Okruhlik 48
did
not find any significant correlation between tax revenue and democratic institutions or
the protection of the civic liberties. Similarly to José Antonio Cheibub, Ross finds that
if taxation has a catalytic effect for a democracy, there is a critical ambiguity, in the
sense that it is unclear “whether democracy is linked to a higher absolute tax burden
(“pure anti tax” model), or a higher tax burden relative to the services the government
provides (“cost-benefit” model)49
”. However, there seems to be strong support for a
higher tax burden relative to the services the government provides. In other words, it
suggests that taxes in general do not have a democratic effect but a rise in the
government`s expenditures is linked to the level of democracy. An increase in the
government`s services brings more democracy. Therefore, “measures that help
authoritarian governments lower the price of government services will, ceteris paribus,
tend to have anti-democratic effects; policies that force them to raise the price of
government services will tend to have pro-democratic effects”50
. These results are
modified by Kevin M. Morrison who argues that externally obtained revenues have a
stabilizing power, in a sense these revenues enable a democratic or autocratic regime
tostay in power by whatever, means are best for the regime. “The causal mechanisms
are that this revenue provides the regime with a greater ability to appease citizens, and
thereby prevent a revolution or transition to democracy”51
. Meaning that democracies
provide elites with lower taxes and autocracies provide society with more social
securities. Jørgen J. Andersen also tested the influence of oil revenues on government
spending and after conducting an unbalanced panel of 63 democratic countries, in the
period 1970 – 2001 he concludes that changes in the governmental revenue have effect
47 Profeta, Paola; Puglisi, Riccardo; Scabrosetti, Simona (2012) “Does democracy affect taxation and government spending? Evidence from developing countries“, Journal of Comparative Economics, (URL: http://dx.doi.org/10.1016/j.jce.2012.10.004, accessed April 22, 2012). 48 Okruhlik, Gwenn (1999) “Rentier Wealth, Unruly Law, and the Rise of Opposition: The Political Economy of Oil States“, Comparative Politics, Vol. 31, No. 3, pp. 295-315. 49
Ross, Michael L. 2004: 234. 50 Ross, Michael L. 2004: 247. 51 Morrison, Kevin M. 2009: 113.
only for the presidential government expenditures but not for presidential parliamentary
expenditures52
.
52 Andersen, Jørgen J. (2009) „The form of government and fiscal dynamics“, European Journal of Political Economy, Vol. 27, p. 306.
22
3. Research design
For better understanding of the effects of taxation for political regimes, I will execute an
empirical analysis. In order to test the main hypothesis I will make three secondary
hypotheses. First, I claim that resource-wealthy countries have different taxation
systems. Second, mineral-rich countries tend to be more autocratic, since citizens are
not made sufficiently accountable by the taxation system. Last, but not least, I argue that
personal income is influenced by the type of political regime. The following chapter
will give a detailed overview of the hypothesis, methods for testing them and used data.
3.1. Hypothesis and methods for testing them
By analyzing the linkage between taxation and level of democracy, I presuppose that
rents from natural resources provide governments with economical autonomy, that they
are not in need to extract taxes from citizens as heavily as resource-poor countries and
therefore have a greater negative effect on social outcome. This research question is
derived amongst others from the previously mentioned Joseph Schumpeter “fiscal
sociology” and also Samuel L. Huntington`s argument in his The Third Wave:
Democratization in the Late 20th
Century - “the lower the level of taxation, the less
reason for the public to demand representation”53
. In order to test the relationship
between taxation and the political regime, a careful empirical analysis is needed.
Hypothesis #1: Resource-wealthy countries have a different taxation system
To start with, I will take a closer look at what the relationship between the tax system
and personal income in countries rich in natural resources is. I assume that mineral
wealthy countries have more financial autonomy and less immediate pressure to collect
taxes from citizens. This raises the question whether resource wealthy countries tax the
population on the same basis as resource-poor countries? If not, there is great reason to
believe that the revenues from the sale of natural resources allow the government
53 Huntington, Samuel P. (1991) The Third Wave: Democratization in the Late 20th Century, Norman: University of Oklahoma Press, p. 65.
23
financial independence from its taxpayers` money, thus setting the stage for decreased
democracy.
Hypothesis #2: Mineral-rich countries tend to be more autocratic, since citizens are not
made sufficiently accountable by the taxation system
Do resource-rich countries follow the same rules in tax systems as resource-poor
countries? By asking this I will check the “taxation effect” claim for the year 2010. It
suggests that when the government gathers sufficient revenues from the sale of oil, it
tends to be less reliant on its tax payers and the public in turn will be less likely to
demand accountability from – and representation from – their government54
.
Hypothesis #3: The type of political regime influences personal income
In order to control previous results I will analyze how personal income is influenced by
the regime. If resource-rich countries are more likely to be associated with inefficient
tax-systems it will result in a negative impact on personal income. As a result of the low
productivity of private investments and business.
3.2 Data and methodology
In this thesis resource-wealthy countries are indicated by share of minerals export in
merchandise export (%) by World Bank (SITC section 3). According to the United
Nations Statistics Division these minerals are coal, coke and briquettes, petroleum,
petroleum products and related materials, gas (natural and manufactured) and electric
current55
. I have analyzed the share of exports of natural resources, since it expresses the
dependency of resource exportation and because revenues from this export are the main
source for the governmental budget. It’s a matter of variety in a country’s exports, not to
become over dependent on fluctuations in a single product’s price on international
market. I have listed moderate resource dependent countries whose export of natural
resources from merchandise exports is between 30-50% and heavily dependent
resource-rich countries, where export of natural resources constitutes more than 50% of
54
Ross, Michael L. 2001: 332. 55 United Nation Statistics Division, Detailed structure and explanatory notes, SITC rev. 3, (URL: http://unstats.un.org/unsd/cr/registry/regcst.asp?cl=14, accessed April 22, 2013.)
merchandised exports. By doing this, many resource-rich countries like Australia,
Canada, United Kingdom, United States of America are not included in this analysis,
since the export of fuels remains under 30 % of merchandise exports.
Do resource-wealthy countries tax the population on the same basis or not? To test this
claim, I use the variable “logincome1000” measured as the natural log of per capita
Gross National Income (GNI) in 2010 with data from the World Bank56
. This indicator
developed by the World Bank reflects the average income of a country’s citizens and
since the indicator is closely linked with other important indicators that measure the
social, economic, and environmental well-being, it decently reflects the general
economical strength. The second variable “taxes % GDP”, which indicates annual % of
revenue taxes from countries` GDP with data collected by IMF in 2010 (Graph 1). It is
important to point out that the data of the tax revenues creates great obstacles for this
thesis. The data has been unpublished for many main resource exporting countries,
since it might be considered sensitive data. In order to cover more countries this thesis
includes the latest data for available from 2010. (See full data for “taxes as percentage
of GDP” Appendix 2)
Secondly, I will analyze whether countries with higher taxes tend to be more democratic
and where natural resource-rich countries are positioned? I assume that mineral rich
countries tend to be more autocratic, since citizens are left out by the taxing system. Do
countries with higher personal taxes tend to be more democratic or not, keeping in mind
the “taxation effect”? Is it true, that democratic countries combine more citizens into
governing the state than autocratic countries? To test this claim I correlated the type of
regime (“autdem”) and tax revenue percentage of GDP (taxes%GDP) (Graph 2). For
„autdem“ variable I used Marshall, Gurr and Jaggers PolitiyIV data for the year 2010.
The Polity IV dataset covers all the major independent states in the global system, (i. e.,
states with total population of 500, 000 or more in the year 2010 164 countries) over the
period 1800 – 201057
. I believe this data reflects the nature of the regime better than the
alternative Freedom House Index, since the latter reflects only the individual and
56 See full data World Bank, (2010) GNI per capita, PPP (current international $), (URL: http://data.worldbank.org/indicator/NY.GNP.PCAP.PP.CD, accessed May 1, 2013). 57
Marshall, Monty G.; Gurr, Ted R.; Jaggers, Keith (2011) “Polity IV Data Series version 2011”, Polity IV Project: Political Regime Characteristics and Transitions, 1800 – 2011, (URL: http://www.systemicpeace.org/polity/polity4.htm, accessed April 22, 2013).
In Graph 1, as well as on other graphs, as we will see later, Algeria presents an odd
deviation from our general tendency, which requires some explanation. After the
discovery of Algeria’s first mineral resource fields Edelleh and Hassi Messaoud in 1956
the hydrocarbons` sector has remained the backbone of Algeria’s economy. There are
3.4 billion cubic meters of proven natural gas reserves and 12.20 billion barrels in
recoverable reserves of crude oil58
. Algeria is currently producing 1.27 million barrels
of crude oil per day. With 4 percent of proven global reserves of natural gas, Algeria
ranks fifth in the world; moreover, only 17 percent of the reserves have been
exploited59
. Besides hydrocarbons, Algeria boasts resources like zinc, phosphates,
uranium and mercury. All this raises the question, why has this resource-wealthy
country deviated from the general rentier state theory? Algeria’s position on the scatter
plot raises several questions. Firstly, while scored as an “open autocracy”, tax revenues
involve a notable part of the Algerian financial budget. Secondly, although fuel exports
constitute more than 97% of Algerian merchandise exports, it has established an
extremely high tax burden. Algeria’s tax percentage of GDP is even higher than the tax
burden in the resource-rich democracy of Norway. Algeria has enormous amounts of
natural resources, an open anocracy and, against all odds, a heavy tax burden. In this
sense, Algeria’s case undermines the “rentier state” theory and its basic claim that
resource-wealth implies low taxation rates that might hinder democracy.
This topic has received relatively little academic attention and, therefore, many
unanswered questions remain. Clement M. Henry argues in his article “Algeria’s
Agonies: Oil Rent Effects in a Bunker State” that “Algeria seems to be a wretched
poster child for this rentier theory of the petrostate”60
. The author sees the reasons for
the failing of the rentier state theory more in the historical perspective than having
natural resources itself. According to Henry, discovering oil in 1956 had no influence
58 Federal Research Division, (1994) Algeria: a country study, edited by Metz, Helen Chapin, p. 147 (URL: http://www.marines.mil/Portals/59/Publications/Algeria%20Study_3.pdf, accessed May 4, 2013). 59 U.S. Energy Information Administration, (2012) Algeria. Country Analysis Brief Overview, (http://www.eia.gov/countries/country-data.cfm?fips=AG, accessed April 2, 2013). 60 Henry, Clement M. (2004) “Algeria’s Agonies: Oil Rent Effects in a Bunker State”, The Journal of North African Studies, Vol. 9, No. 2, p. 69.
political intermediaries for the ruling power. Meaning that many scholars have referred
to this unconventional decision process as a “mafia type of industrialism”.
According to Clement Moore and Henry Robert Springbor there are altogether six
countries that could be called bunker states. Besides Algeria also Saddam Hussein’s
Iraq, Qaddafi’s Libya, Omar al-Bashir’s Sudan, Bashar al-Assad’s Syria, and Abd
Rabbuh Mansur al-Hadi’s Yemen64
. The aim of these states is to marginalize the private
sector and limit the freedom of information or autonomy of economic action. Scholars
see the reasons for this in the historical perspective and in the unconventional path of
development of civil society rather than having the natural resources itself.
Leaving behind the historical point of view, what could be the reasons for Algeria being
odd variation in its fiscal policy? After several attempts to liberalize the economy from
the heavily centralized system and attract foreign investments, encourage domestic
savings and investments, the mafia type decision-making legacy is hard to wash away.
Although the Algerian government has expressed their interests to liberalize its
economy the top-down decision perspective is still dominating and the outcome will be
heavily dependent on the oil price in the global market. John P. Enteils argues in his
article that Algeria is extremely dependent on oil prices. The author calls it pendulum
swinging – during low prices of oil, Algeria has sought to attract investments, to push
market reforms and push efficiency, but as soon as the price rises the government
withdraws all the changes65
. Only one example of this push-and pull strategy is the
Algerian Hydrocarbons Reform Bill of 2005 and the subsequent changes to this
legislation.
In order to liberalize the economy, more than 450 state-owned enterprises, including
banks were granted with autonomy to two-thirds of the companies. Also, state
controlled monopolies for import were opened to foreign and domestic companies.
However, after Egypt`s mobile phone operator Osasco’s decision to sell cement plants
to France in 2007, Algeria established several constraints for foreign investors. Since
64 Henry, Clement M.; Springborg, Robert (2010) Globalization and the Politics of Economic Development in the Middle East (The Contemporary Middle East), Cambridge University Press, p. 99. 65
Entelis, John P. (2012) “Sonatrach: the political economy of an Algerian state institution”, edited by Victor, David G.; Hults, David R.; Thurber, Mark C., Oil and Governance: State-owned Enterprises and the World Energy Supply, Cambridge University Press, p. 558.
31
then, foreign investors can own only 49% of any Algerian company and cannot buy real
estate for constructing factories. By now the privatization process has slowed down due
to a general lack of interests among foreign investors and a lack of confidence among
government leaders. Foreign investors are faced with unpredictabilities and enormous
bureaucracy when doing business. Measures are often imposed suddenly and without
consulting with the business community. Moreover, the Word Bank ranked Algeria as
no. 152 in ease of doing business in 2012.
According to U.S & Foreign Commercial Service and U.S Department of State it is
estimated that 50 percent of Algeria’s economy is informal66
. This means that about half
of the economy is not reflected on the tax level. Furthermore, approximately 10
percentage of the population is unemployed. The non-oil sector has experienced strong
growth, averaging 6 percent a year between 2003 – 2007, but the oil and gas sector is
still the backbone of the economy. Fuel revenues in 2010 represented 97 percent of
exports, whereas hydrocarbon rents composed only 31% of the GDP. Since oil is the
main and most profitable export article in Algeria, I have hereby used the percentage of
oil rents of GDP.
This means that although mineral export dominates in the merchandise export, the
proportion of hydrocarbons out of total GDP is rather low compared to other resource-
rich countries. The economy is still poorly diversified and as we can see in the Table 2
the oil income out of total GDP is rather low, forcing it to depend on higher taxes.
Taxes established include progressive personal income tax rates up to 35% on amounts
over DZD 1.44million per annum and corporate profits tax, which was 45% on
distributed profits and 20% on reinvested earnings.
66 U.S. Commercial Service (2011) Doing Business in Algeria: 2011 Country Commercial Guide for U.S. Companies, (URL: http://export.gov/middleeast/country_information/algeria/ccg%202011%20algeria.pdf, accessed April 4, 2013).
TABLE 2. “Countries with highest oil as share of GDP and countries with highest
minerals as share of exports”
Oil rents
(% of GDP)
2010 Fuel exports
(% of merchandise exports)
2010
Iraq 69,1 Algeria 97
Congo, Rep. 61,6 Azerbaijan 95
Saudi Arabia 50,5 Venezuela, RB 93
Equatorial Guinea 47,3 Yemen, Rep. 91
Gabon 46,4 Saudi Arabia 87
Angola 46,1 Nigeria 87
Azerbaijan 42,6 Oman 81
Chad 41,2 Bahrain 74
Nigeria 29,5 Iran, Islamic Rep. 71
Kazakhstan 22,4 Congo, Rep. 68
Ecuador 20,2 Trinidad and Tobago 66
Turkmenistan 19,7 Russian Federation 64
Yemen, Rep. 19,0 Norway 64
Sudan 18,5 Colombia 60
United Arab Emirates 18,0 Ecuador 55
Venezuela, RB 18,0 Syrian Arab Republic 50
Algeria 17,6 Cameroon 50
In conclusion, Algeria is an odd case, I quite do not resolve here. It enjoys great benefits
from selling hydrocarbons, a high taxation rate and is autocratic at the same time. This
triangle of indicators is beyond the rentierism theory. Although a comprehensive
analysis on Algeria’s case is out of the scope this thesis I propose possible explanation
to be in the historical perspective of the bunker state theory. It would be interesting to
analyze the other bunker states, however, data for all other previously named bunker
countries is not available(!). Also, it is worth noting that oil revenues compose under
20% of Algeria’s GDP, which implies that income from fuels is not sufficient and
higher taxes are needed.
33
4.2 Hypothesis #2: Mineral-rich countries tend to be more autocratic,
since citizens are not made sufficiently accountable by the taxation
system
The following subchapter analyzes whether countries with higher taxes tend to be more
democratic and what we can say about natural resource- rich countries. In Graph 2 we
can see that there is no pattern for mineral-healthy countries, although more heavily
resource dependent countries tend to have less democracy and a lower tax system. More
than 6% of resource-rich countries have variable “autdem”<0 (tendency to be more
autocratic ) (See Table 3). These results implicate that more autocracies with natural
resources tend to have lower taxes than countries with poor natural resources. Most of
the heavily resource-exporting countries tend to be autocratic and with a low tax system
(autdem<0). Less heavily resource-exporting countries tend to be more democratic
along with an average tax system. However, countries with autdem>0 tend to have no
natural resources and a higher tax system. In this graph, Algeria’s case again raises
interest. If my general hypothesis is correct, Algeria’s heavy tax burden should qualify
as a full democracy. However, in this case it is considered a semi-democracy.
34
GRAPH 2. „Taxes as percent of GDP vs. Regime Type“
TABLE 3 “ Natural minerals exporting countries by regime type”
autdem>0 autdem<0
Total: 116 countries
Fuel export 30 – 50% 3 1
Mean - 0,86
Fuel export 50 – 100% 4 8
Mean - 6,90
35
4.3 Hypothesis #3: the type of political regime influences personal
income
Hypothesis #3 analyzed the relationship of how personal income is influenced by the
regime type, especially in resource abundant countries.
Graph 3 seems to demonstrate a slight C-shaped pattern. For high “autdem”, democracy
increases as income increases. Yet for low “autdem”, democracy decreases as income
increases. Most of the countries in this group are heavily dependent on resource export,
so one could propose that the more a state receives mineral export funds the more it can
ignore popular demands, because it does not extract taxes from people and can buy off a
sufficient number of people in order to avoid resistance. However, there are some odd
deviations. There are resource-poor countries that follow the pattern of resource-
wealthy countries. It is worth pointing out that these countries with autocratic
tendencies and with higher incomes are mostly relatively small countries mainly located
in Africa. More interestingly, 11 countries out of 16 have not published their tax
revenue percentage after 2010 (See Appendix 2).
It is worth pointing out that personal average income per capita gross national income
(GNI) creates some obstacles. While reflecting well the general economic performance
of countries, the indicator of income as a country’s final income in a year divided by its
population does not reflect how the wealth is produced. How much could be private
business or state owned? In this case it could be crucial. Taking into account the value
added by all resident producers plus any product taxes, the GNI per capita does not say
anything about such distribution. Finding this kind of data is extremely complicated and
stays out of the scope of this thesis. However, taking a closer look at Graph 3 gives us
reason to believe that in the top right corner NOR, POR,SLV, GR may have a relatively
low state ownership and in the bottom right corner of the Graph 3, on the other hand,
KUW, QAT, UAE, BAH, SAU, OMAN may be inclined to have more state ownership.
This gives us reason to believe that the wealth generated by the private sector has
greater democratic influence than wealth distributed by state-owned sector.
36
GRAPH 3. “ Regime Type vs. personal income as per capita GNI “
37
5. Case study
The presented analytical research paints a complex picture of the relationship between
political regime and applied fiscal system in resource-wealthy countries. In order to test
the results of my thesis, I have selected three countries – Norway, Venezuela and Qatar.
Case analysis selection was based on methodological reasons and to have examples
from different regions of the world. First, Norway represents a counter-example to the
whole study. Unlike most resource dependent countries, Norway represents a strong
mature democracy with a high level oil fund transparency, which does not support
misuse and corruption. Venezuela, on the other hand, represents an ideological
dimension. The country has transformed from autocracy to democracy and is showing a
tendency of leaning towards autocracy again. Last, but not least, the case of Qatar
differs from others significantly. Qatar has not been ruled by any ideological
movements but has remained a strong stagnant autocracy. Furthermore, Venezuela and
Qatar have experienced a considerably erratic fiscal system so we can analyze the
taxation effect simultaneously on a country with a democratic and autocratic
background. Secondly, I have considered geographical variation. As stated previously,
rentier state theory has not applied strictly to oil countries in the Middle East. I have
limited the work to countries that could provide a more general analysis. Thirdly, I
considered the importance to the global energy market. Norway, Venezuela and Qatar
are included since they are among the most significant players in the fuel sector.
Analyzing the fiscal policy and type of regime on a micro level poses some major
obstacles. Cross country data for taxation burden over time is missing some crucial
information. However, in order to retain the coherence with the general model, I use the
same data from World Bank and Polity IV by Marshall, Gurr and Jaggers used earlier in
our model building.
5.1 Norway
The case of Norway displays as an anomaly to the “resource undermines democracy”
claim. Although discovering massive resources of petroleum reserves in the North Sea
in the late 1960s and 1970s, resource wealth has not influenced Norway`s democratic
38
development. According to Marshall, Gurr and Jaggers Polity IV data Norway is
indicated as a full democracy before and after discovering oil reserves without any
exceptions. Furthermore, Norway has managed to transform oil revenues into an
economic success story. Although one can claim that Norway had the fortune to
discover oil reserves after becoming a mature democracy with developed institutions
and competent bureaucracy, many scholars have claimed petroleum has even improved
Norway`s economical performance. Erling Røed Larsen argues in his research
“Escaping the Resource Curse and the Dutch Disease? When and Why Norway Caught
up with and Forged Ahead of Its Neighbors” that Norway is a significant example
because before discovering oil in 1960s the country’s gross domestic product per capita
was much lower compared to other Scandinavian countries67
. The economical
acceleration started a few years after discovering oil and today Norway is one of the
richest countries in the world by cross domestic product at purchasing power parity per
capita (GDP (PPP)) passing all neighboring countries. Therefore, Norway has proved
that natural resources might not necessarily have democracy- undermining features. On
the contrary, natural resources might play a crucial role for democratic development.
How does the case of Norway relate to this thesis? Norway represents a true anomaly to
Hypothesis #1, which argued that resource-rich countries apply a different kind of fiscal
policy than resource-poor countries. In Graph 1 we can see that resource-rich countries
do not tend to follow the pattern of resource-poor countries with the exception of
Norway. Heavily oil- dependent Norway follows the pattern of resource-poor countries
more than natural-resource-rich countries. Having a relatively high personal high
income per capita, Norway has a high taxation burden like many resource-poor
countries. In other words, Norway has not let oil influence the previously established
taxation burden in order to keep the demand for political accountability.
Which brings us to Hypothesis #2, according to which the presence of large resource
rents tends to reduce the burden of taxation on citizens in order to reduce accountability.
In Graph 2 we can see how Norway opposes Hypothesis #2. Heavily resource-
dependent Norway has introduced a high taxation burden for citizens, resulting in
67
Larsen, Erling Røed (2006) “Escaping the Resource Curse and the Dutch Disease? When and Why Norway Caught up with and Forged Ahead of Its Neighbors”, American Journal of Economics and Sociology, Vol. 65, No. 3, pp. 605-640.
39
democratic accountability. In order to stay coherent with the general research model
presented in this thesis I used the same Polity IV and taxation as a percentage of
domestic gross product data by World Bank. Unfortunately, there is no information
about taxation burden available since the major oil reserve discoveries in 1969,
therefore data available from 2000 – 2010 were used. As can be seen from Graph 4, the
tax burden in Norway has lingered between 25-30% of GDP without any change in
regime. The limited data provided by World Bank, Polity IV and Graph 4 gives us great
reason to believe that the taxation system did not influence the stable regime. Also, the
following explanation provides us with clear evidence in support of a positive
relationship between the taxation burden and regime type in resource-rich Norway.
GRAPH 4 “Relationship between taxes as a percentage of GDP and political
regime in Norway in 2000 – 2010”68
How can we explain these results? As already noted, Norway had a privileged position
when it entered its oil era, with a mature full democracy and bureaucratic institutions
with experience of regulating other natural resources-dependent sectors such as
68
Own compilation based on regime type from Marshall, Monty G.; Gurr, Ted R.; Jaggers, Keith (2011) and annual % of revenue taxes from countries` GDP with data collected by IMF in 2010 (See full data Appendix 2.
40
hydroenergy, fishing and mining. Norway had a functioning industry and low
unemployment. For these reasons, Mark C. Thurber and Benedicte T. Istad conclude in
their research “Norway`s evolving Champion: Statoil and the politics of state
enterprise” that “Norway`s orientation [dealing with resources] was different from
almost all of the other nations that came into petroleum riches, with a balance of risk
and reward that tilted more in the direction of avoiding disruption than seeking
immediate economic gain”69
. Norway could have managed and was managing well
without any revenues from oil, and, therefore, the priority was not to increase wealth,
but rather avoid the negative effects from “unearned” revenues.
But this is not all. Being aware of possible negative effects of monetizing natural
resources, the Norwegian government, unlike other countries with newfound natural
resources, took oil management under careful supervision and debated publicly on how
to manage hydrocarbons. Interviews carried through by the Program on Energy and
Sustainable Development (PESD) reveal that the Norwegian government deliberately
did not want to change the economy, the political system or affect in any other way the
society, which was already functioning quite well in the opinion of its citizens70
. The
overriding goal was to stay on the same path as previously. This idea was supported by
the fact that Norwegian government carried through overwhelming research about other
countries’ experiences and created “The Ten Commandments” (1971) of guiding
principles for managing natural resources, and the “Parliamentary Report 25” for
“considering potential effects of petroleum development on diverse aspects of society,
focusing in particular on macroeconomic balance, employment, and industrial structure,
but even touching on such fine grained topics as possible increased commute times for
petroleum workers and consequent disruption of social and family life“71
. The best
option to achieve these goals was to create some kind of National Oil Company (NOC).
Although the reasons for this varied, a fully state-owned oil company – Statoil, the
Norwegian State Oil Company (Den Norske Stats Oljeselskap AS) – was created in
1972. Understanding the problems involved with fully national oil companies, Statoil
69 Thurber Mark C.; Istad, Benedicte T. (2012) “Norway`s evolving champion: Statoil and the politics of state enterprise”, edited by Victor, David G; Hults, David R.; Thurber, Mark C., Oil and Governance: State-Owned Enterprises and the World Energy Supply, pp. 610-611. 70
PESD (Program on Energy and Sustainable Development) (2006) „National Oil Companies: Strategy, Performance and Implications for Global Energy Markets“ Prospectus, Stanford University, p. 610. 71 Thurber Mark C.; Istad, Benedicte T. 2012: 611.
41
goes to stock with 67% of shares to the Government of Norway. As stated earlier, “one
of the fundamental strengths of Norwegian oil governance was precisely the
combination of a thoughtful and comprehensive initial roadmap with flexible
subsequent policymaking against the background of a diverse political system“.72
This distinctive way of revenue management has been pointed out as the “Norwegian
Model”, which refers specifically to an administrative design that separates commercial
from policy and regulatory functions in hydrocarbons”73
. The “Norwegian Model” is
basically an administrative system in which petroleum resources have been
administered by using three state-controlled bodies. First, national oil company Statoil,
which is engaged in commercial hydrocarbon operating. Second, the policy making
body, the Ministry of Petroleum and Energy, whose’ responsibilities’ involves goal
setting and forcing policies into law. Third, the regulatory body, the Norwegian
Petroleum Directorate (NPD) collects data, advises the Ministry on technical matters
and sets regulations related to resource management. According to authors Thurber,
Mark C.; Hults, David R.; Heller, Patrick R.P; „Exporting the „Norwegian Model“: The
effect of administrative design on oil sector performance“ the theory of „Norwegian
Model“ has improved oil sector performance in Norway in several ways74
. Firstly,
National Oil Companies are believed to focus more on its commercial activities and
performance of oils sector and actors involved by being monitored and benchmarked by
the government. Thirdly, the risk of conflicts of interests are diminished, since all the
distinctive bodies in the oil sector are submerged under the government and its goals.
Fourthly, the state’s involvement in hydrocarbon policy prevents at „state within a
state“ situation, by preventing NOCs from capturing other state institutions.
So far, I have discussed how Norway managed with the enormous oil discoveries.
However, this does not fully explain how Norway has managed to keep a democratic
path. I would like to point out two possible explanations. First, understanding that the
oil revenues are not infinite. The need to provide future generations with wealth lead to
72 Thurber Mark C.; Istad, Benedicte T. 2012: 614. 73
Thurber, Mark C.; Hults, David R.; Heller, Patrick R.P (2011) “Exporting the „Norwegian Model“: The effect of administrative design on oil sector performance“, Energy Policy, No. 39, p. 5366. 74 Thurber, Mark C.; Hults, David R.; Heller, Patrick R.P 2011: 5368.
42
the establishment of the Government Petroleum Fund (GPF) in 1990. Today it is called
the Government Pension Fund or just Fund, and is aimed to protect the Norwegian
economy from petroleum related economic fluctuations in the global market. As we will
see in comparison to other case analyses, these stabilizing mechanisms like the Fund
and the Action Rule with other factors like transparency, media scrutiny, and the rule of
law serve a great deal in a country’s economy. Secondly, interviews carried through in
the Program on Energy and Sustainable Development brought out that public ignorance
about spending oil revenues also played a great role. The lack of public visibility on
how the revenues are spent does not give the impression of unbounded national effect.
For these reasons the traditional work-reward causality remains.
Norway had to face the same problems and obstacles like every other country that
suddenly discovered large deposits of natural resources. However, unlike most
petroleum-dependent countries, Norway had a very thoughtful and distinctive roadmap
in order to prevent negative effects from the utilization and monetization of natural
resources. The applied strategy of separate institutional bodies called the “Norwegian
Model” is characteristic only to Norway. Although several countries, like Algeria,
Brazil, Mexico, Nigeria, have tried to apply this model, the outcome has been modest
and they have not met the sustainable and effective separation of functions. Moreover, a
comprehensive research on the adaptability of the „Norwegian Model” concludes that
„although the model is, as suggested by the Natural Resource Charter (2009), as a ’best
practice of sorts , it is not the right prescription for every failing oil sector around the
world“75
.
5.2 Venezuela
Another significant case to analyze is the case of Venezuela. The oil era in Venezuela
started back in 1914 with commercial oil development from the Mene Grande fields by
foreign owned Caribbean Petroleum. The oil sector burst after discovering enormous oil
fields at Las Cruces and La Rose. Venezuela became the world`s leading oil exporter
and second-largest oil producer. Unlike the majority of Latin American states during the
1960s and 1970s, Venezuela followed a path of democracy supporting the claim that
75 Thurber, Mark C.; Hults, David R.; Heller, Patrick R.P 2011: 5376.
43
natural resources might actually promote democracy. Until recently, Venezuela was
considered a success story of combining natural resource wealth with democracy,
having a high level of economic growth, an improving social and economical sphere
and a high degree of upward mobility. However, recent political developments in
Venezuela have made it a rather poor example of crude democracy, a notion borrowed
from Thad Dunning. According to the author of the “Crude Democracy”, the concept
embraces the idea of democracy being fostered, supported, or sustained by oil wealth76
.
Since January 1st 1976 fully state owned Venezuela National oil company Petróleos de
Venezuela, S.A has experienced a variety of events, including nationalization,
internationalization and transformation under strict state control. In the comprehensive
Stanford Report “Oil and Governance: State-owned Enterprises and the World Energy
Supply”, David R. Hults characterizes the Venezuelan case as a “most significant recent
transformation of the National Oil Companies being the most capable, forward thinking
and autonomous NOCs between 1976 and 2000s77
. It seems that oil revenues that once
enabled the rise of democracy in Venezuela have become the main culprits for
undermining democratic development in recent years. A closer look at how the
relationship between taxation burden and regime type has evolved in Venezuela will be
given and reasons behind it explored in the following section.
The macroeconomic history of Venezuela has been very diverse and, unfortunately, data
provided by World Bank does not include the early era of oil in Venezuela and data
after 2006 when there was a huge shift toward a more autocratic regime. The
diminishing of democracy has gradually taken place already since 1991, resulting in a
closed anocracy in 2008. According to the general model the case of Venezuela does
not support Hypothesis #1. Venezuela tends to fit more with the resource-poor
countries. Natural resource-poor countries with similar logincome1000 have similar
taxation as percentage of GDP and Venezuela is close to the best fit line. On the other
hand, the case of Venezuela appears to support Hypothesis #2 in a sense that its
relationship between taxation burden and regime type is more similar to resource-
wealthy countries than resource-poor countries. Venezuela, as a closed anocracy has a
76 Dunning, Thad 2008: 1. 77
Hults, David R. (2012) “Petróleos de Venezuela, S.A. (PDVSA): from independence to subservience”, edited by Victor, David G.; Hults, David R., Thurber, Mark C., Oil and Governance: State-Owned Enterprises and the World Energy Supply, Cambridge University Press, p. 418.
44
lighter taxation compared to resource-poor full democracies. Although the financial
policy has been relatively fluctuating, we can see a general decreasing pattern from
1991 to 2006. The strengthening of autocracy and declining fiscal burden gives us
reason to believe that economical autonomy provided by oil revenues allows the
Venezuelan government to exclude citizens from demand for democratic accountability
by lowering the burden of taxation.
GRAPH 5 “Relationship between taxes as a percentage of GDP and political
regime in Venezuela in 1991 – 2010”7879
Why has the Venezuelan success story turned around? What might be behind the
differences compared to the case of Norway? Do the reasons for the difference lie in the
changes in the relationship between fiscal policy and regime type in Venezuela? I would
like to bring out three main differences compared to Norway`s path in managing with
oil revenues and its possible negative effects.
78 Own compilation based on regime type from Marshall, Monty G.; Gurr, Ted R.; Jaggers, Keith (2011) and annual % of revenue taxes from countries` GDP with data collected by IMF in 2010 (See full data Appendix 2). 79 Cautionary note: Time scale is uneven prior to 1991.
45
First, a different starting point has to be brought out. We noted earlier that Norway was
a fully mature democracy with developed institutions and with rising economic
development. In the 1920s when Venezuela discovered its hydrocarbon reserves,
Venezuela was, on the other hand, an autocracy with a strong militant background,
according to Marshall, Gurr and Jaggers Polity IV data. Discovering enormous oil
reserves did not give rise to public discussion on how to manage oil revenues and how
to make use of revenues to maximize the benefits for the country. On the contrary, there
was no fixed plan for further actions dealing with oil management. In the beginning the
international companies were granted a “fifty-fifty profit split” for a 40 year concession
agreement. However, political instability followed by attempts to modify previous
contracts lead to the nationalization of the oil company in 1976.
Secondly, as we can see, the path to NOC was rather long and complicated. The
comprehensive book „Oil and Governance: State-Owned Enterprises and the World
Energy Supply“ claims, that PDVSA was built heavily on its private sector heritage and
was therefore often referred to as a “Trojan Horse”80
. This private business under
government control still lacked a strategic plan except for maximizing profits. The
international economic situation was advantageous due to the oil price boom of the
1970s, followed by the Arab oil embargo of 1973 and the Iranian hostage crisis in 1979.
As a consequence, oil revenues generated a record share of the overall State budget.
While in the 1930s petroleum provided just 30 % of the government`s total fiscal
revenues, it had increased to nearly 60 percent by 1968 and reached its peak of 86
percent in 197481
. Thad Dunning argues that the positive effects of petroleum price
shocks was the main reason that enabled Venezuela to put into practice massive public
spending without much cost to elites82
. As we see in Graph 5, the advantageous
international economical situation played out winning cards for the Venezuelan
democracy. From 1969 until 1991 Venezuela had the highest democracy score
according to Polity IV data.
However, it was clear that this global situation was not sustainable and revenues
couldn`t keep increasing. This leads to the third point. In Venezuela, there were no
80
Hults, David R. 2012: 426. 81 Dunning, Thad 2008: 162. 82 Dunning, Thad 2008: 163-4.
46
counterbalancing powers installed like in the “Norwegian Model”. This self-governance
granted the state economic independence and a power that was free from civilian or
political control, thus allowing to act according to their own best interest. Roberto
Briceño León concludes in „Petroleum and Democracy in Venezuela“ that this
economic independency of the government also leads to extreme fragility, because such
governments depend on a fluctuating revenue that is not based on a solid, normal source
of profits, but on an extremely fragile exceptional one83
. Any drop in price of petroleum
could lead the State to an economic crisis. That said, Venezuela was more exposed to
oil price fluctuations in the world market than Norway. There were no funds created to
smoothen the fluctuations. Reduced oil revenues had an enormous effect on public
spending. The external rent revenues were considerably cut in the 1980s and 1990s after
the peak in oil rents. This reduced oil revenue was exhibited most visibly in growing
class inequality and political instabilities. The decline in oil rents made democracy and
previously established social securities significantly more costly to ruling elites. In the
beginning of the 90s, social spending was below its 1980s level, including “real cuts of
greater than 40 percent in education programs, 70 percent in housing and urban
development, 37 percent in health care, and 56 percent in social development and
participation”84
. The gross domestic product fell nearly 20 percent from the late 1970s
to the mid-1990s, influencing mainly lower-income groups. As a result, a tax reform
first proposed already in the 1960s was pushed through. Political party Acción
Democràtica tried to enforce the law proposals already in 1966 (also 1971; 1975, 1986,
and 1989) but these were rejected because of hostility from the elites, since they did not
see the actual need for it.
As a result this new social and economic situation represented a new polarization of
classes, which required a new approach. This lead the way for new political structures
and especially the populist symbol of “people’s power” – Hugo Chàvez. Ivan Krastev
characterizes Venezuela as a democracy`s double – a regime that claims to be
democratic and may look like a democracy, but which is ruled like autocracies.
83 León, Roberto Briceño (2005) “Petroleum and Democracy in Venezuela“, Social Forces, Vol. 84, No. 1, p. 5. 84
Roberts, Kenneth (2004) “Social Polarization and the Populist Resurgence in Venezuela,“ in Ellner, Steve; Hellinger, Daniel eds. Venezuelan Politics in the Chaves Era: Class, Polarization, and Conflict, Boulder: Lynne Rienner Publishers, p. 59.
47
“Democracy Double can best be understood as an attempt to construct political regimes
that mimic democratic institutions but work outside the logic of political representation
and seek to repress any trace of genuine political pluralism” 85
. After a successful
presidency campaign in 1991 Hugo Chàvez pushed through several laws that secured
state control over PDVSA. In 2000, the New Hydrocarbons law was introduced, which
required future private investments to take the form of a joint venture with majority
PDVSA ownership. Later, Chàvez purged the company from dissidents, converting
PDVSA from a commercially oriented firm to one that is less proficient but much more
attentive to state objectives, creating a “state within a state” situation.
5.3 Qatar
At first glance, Qatar represents a pure case of rentierism. Today, Qatar holds the
world’s third largest natural gas reserves and is the single largest supplier of liquefied
natural gas. Proven reserves of oil were the 13th
largest in the world at the end of 2012
with 25.38 billion barrels. Production and exporting of crude oil has tripled since 1986
and comprised more than 70 % of merchandise exports in 2009. Oil and gas account for
more than 60% per cent of the country’s gross domestic product, around 85 per cent of
export earnings and 70% of government revenues. However, significant oil revenues
have not had a democracy-boosting effect. Being highly dependent on oil exports, Qatar
has been rated a pure autocracy according to Marshall, Gurr and Jaggers Polity IV data
without any slight change since 1971 when first data was published for Qatar. Today,
the fully state owned petroleum company Qatar Petroleum (QP) is closely linked with
the state’s political and economic interests. This is illustrated by the fact that Qatar
Petroleum`s Chairman & Managing director HE Dr. Mohammed Bin Saleh Al-Sada is
also the head of the Ministry of Energy and Industry of Qatar.
How is the case of Qatar connected to this thesis? The case of Qatar fits with the theory
of rentierism relatively well. Analyzing the taxation system in resource rich countries,
the case of Qatar clearly supports Hypothesis #1. Having high personal income per
capita the introduced taxation burden stays low compared to resource-poor countries on
that level (Graph 1). Qatar has a slightly higher taxation burden than most natural
85 Krastev, Ivan (2006) “Democracy`s „Doubles““, Journal of Democracy, Vol. 17, No. 2, p. 52.
48
resource-rich countries and it clearly does not follow the pattern of resource rich
countries. When it comes to Hypothesis #2, support from the case of Qatar remains
modest (Graph 2). Although scoring a full autocracy, the taxation burden stays
relatively high compared to other resource-rich autocracies. The established taxation
burden for citizens has had no influence on political outcome whatsoever. This point is
clarified in Graph 6. While having an erratic fiscal system, even the 10 percent point of
difference in the tax burden as a percentage of gross domestic product has not
influenced the outcome of accountability and bigger representation.
GRAPH 6 “Relationship between taxes as a percentage of GDP and political
regime in Qatar in 2004 – 2010”86
In other words, the case of Qatar supports the idea of a different path of development
for resource- rich countries, however, undermining the idea of the “taxation effect”.
How can we explain the resistance of “taxation effects” of autocratic natural resource
rich Qatar? Furthermore, how does the case of Qatar relates to previous case studies of
Norway and Venezuela?
Similarly to Venezuela, Qatar has a very diverse historic background. Oil was
discovered in 1940 in Dunkhan Field when Qatar was ruled by Sheikh Abdullah bin
86
Own compilation based on regime type from Marshall, Monty G.; Gurr, Ted R.; Jaggers, Keith (2011) and annual % of revenue taxes from countries` GDP with data collected by IMF in 2010 (See full data Appendix 2).
49
Jassim Al-Thani who was recognized by the British rule. Although the Qatar Petroleum
Company was granted a 75-year oil concession, it was not until 1971 when Qatar
declared its dependence from British rule. The oil sector was immediately fully
nationalized and linked with the authority of Finance and Petrol Ministry at that time.
Since then the oil sector have stayed under strong state supervision and serves the
political and economical interests of their leaders.
Steven Heydemann refers to the political path of Qatar as an Arab authoritarian
exceptionalism. By this, the author of the article “Authoritarian Learning and Current
Trends in Arab Governance” means that the authoritarian governance in Middle East
shares some distinctive features from the rest of the authoritarian rules. In other words,
“a condition in which political trajectories are explained by reference to feature unique
to the Arab world87
. Benjamin Smith sympathizes with the idea of Arab exceptionalism
and argues that after a slight decline in the state’s involvement, the oil-gas funded
mercantilism is on the rise again. “Use of trade as a foreign policy tool (or weapon), and
of resource revenue-driven economic planning has emerged as an explicit challenge to
that trend and especially oil-funded mercantilism in the 21st century began, really, in
1999 with the tripling of oil price”. Furthermore, Andrew Rathmell and Kristen Schulze
argue in article “Political Reform in the Gulf: The Case of Qatar”, that the majority of
Arab countries have experienced a special kind of authoritarian regime labeled as
“democracy of bread” – “the tacit social contract in which the regime provides social
and economic welfare in return for political loyalty”. So, as we can see, Qatar poses a
very different story from the case of Venezuela and Norway. Qatar has never
experienced a democracy and moreover, has never had the intention to move toward it.
Also, no counterbalancing mechanisms similar to Norway were implemented.
This raises the question why have there been no attempts to move towards more
accountability? Graph 6 indicates that fiscal systems have had no influence on political
regime. I would like to bring out two possible explanations. Unlike many rentier states,
resource rich Qatar has not failed nor experienced economic breakdown. On the
contrary, bounties from the oil revenues are not limited only to the ruling power. Qatar
87 Heydemann, Steven (2009) “Authoritarian Learning and Current Trends in Arab Governance”, Oil, Globalization, and Political Reform, Governance Task Force: 2009 U.S. – Islamic World Forum, p. 32
50
is one of the world’s richest countries and so are it citizens. The GDP per person of
$80,000-plus at purchasing-power parity vastly underrates the wealth of a pampered
250,000 or so who hold the privilege of citizenship. In 2010 its tiny population had the
third highest per capita GDP in the world and its economy grew by 16.6%, faster than
any other. Extreme oil wealth has implemented the „democracy of bread“ to an extreme
degree, granting citizens several social securities like free health care, education etc.
Secondly, the Economist’s article „Pygmy with the punch of a giant“ argues that since
the emirate is extremely small, holding only 1.7 m people and fewer than one in seven
of them are native-born citizens, this decreases the desirability of democracy88
. The
extreme wealth is divided among a small population and there is no attempt to share it
with broader public. In fact, in 2003 Qatar had a democratic referendum. Qatar`s first
constitution, enforced in 2005, left real power to the Amir and his family but gave
citizens the power to directly elect 30 of the 45 members of the Advisory Council.
However, the general impression to first-ever parliamentary election would be held in
2013 was very mild89
.
To sum up, the case of Qatar is not a typical case of rentierism. Contrary to the theory
of rentierism the revenues of natural resources have transformed into economic
prosperity not into democracy. There are no counterbalancing mechanisms introduced
like in Norway. After discovering more offshore natural gas fields in 2013 with, more
than 2.8 trillion cubic feet90
of reserves is decreasing the probability of pro-democratic
developments any time soon. However, understanding the finite nature of natural
resources, Qatar has started to stimulate the private sector and a “knowledge economy”
labeled Qatar National Vision 2030. The aim is to secure the future with human capital.
The immediate results have been the Qatar Science Technology Park (QSTP), the Qatar
Foundation for Education, the Science and Community Development and Education
88 (2011) “Pygmy with the punch of a giant” The Economist, (URL: http://www.economist.com/node/21536659, accessed April 4, 2013). 89 Ibidem. 90
(2013) Qatar discovers new natural gas field, Aljazeera, (URL: http://www.aljazeera.com/business/2013/03/201331019541509471.html, accessed April 22, 2013).